I had decided last week to write today about what happens in an overall market when one or two significant sectors are performing poorly and have weak future prospects. Is the rest of the market indifferent to the laggards? or do the weak sectors work to sap the strength of sectors where business is good and the outlook favorable? This is potentially important, given the miserable performance of the Energy, Materials and Industrials sectors–and the likelihood of no positive news for these areas of the stock market for a considerable time to come.

After I saw the sharp negative reaction of the market to the so-so Employment Situation report released Friday morning, I decided to push that post back until tomorrow and write about Friday’s market action instead.

There’s been lot of discussion recently about the role of computerized trading in influencing the day-to-day, or hour-to-hour, direction of stocks on Wall Street. Understanding what effect this trading is having on stocks is the first step in the stock market’s judo-like process of beginning to use the momentum of such trading against itself. For investors like us with long holding periods in mind, one might argue that day-to-day volatility has little significance. Even so, it seems to me it’s important to be able to read the signals the market is sending …alao, understanding the rhythms of daily trading can be some help in determining the timing purchases and sales we may be thinking about for strategic reasons.

Last Friday, stock index futures fell immediately on the Labor Department release of the monthly ES report. Stocks fell sharply at the open, an hour later. Equities remained depressed for about an hour, before beginning a steady ascent through the rest of the day. The S&P 500 closed on its high. This is a particularly positive sign, since professional traders tend not to want to hold positions over the weekend if they have even the slightest worries.

On the surface, the ES report isn’t encouraging reading. The economy gained 142,000 jobs last month. That was substantially below the average gain for the past year, and it was much less that the 200,000 new positions that economists had estimated. More than that, the two previous months’ estimated job gains were both revised down. All of this was emphasized in media reports that were available a minute or two after the 8:30am edt release of the information.

Several important factors weren’t mentioned, however:

–economists’ estimates of +200,000 new jobs were, as usual, very close to the average monthly gain in jobs over the past year, leading me to conclude that getting this figure right is not their highest priority

–that’s understandable. The Labor Department says that the monthly job figures from its Establishment survey are correct to within +/- 100,000, meaning a “miss” of 50,000 or so jobs contains no statistically significant information

–we’ve seen outlier months occasionally over the past several years. In each case, job gains have soon returned to trend

–the latest JOLT (Job Openings and Labor Turnover) Survey from the Labor Department shows that the country has 5.7 million unfilled jobs at present, a figure 25% higher than at the previous economic peak in 2007. This is also an all-time high for the JOLT tally, which makes it hard for me to believe that the September jobs report heralds a significant downshift in US economic activity.

How do I read Friday trading?

I think computers programmed to read news services pushed the market down, both in pre-market futures trading and in the first hour of actual stock trading, as well. Human traders (smarter computers?) waited for the downward momentum to exhaust itself and, recognizing that this initial move was a mistake, then began buying.

Although I think my analysis is correct–Friday’s trading pattern was very unusual–I also find it very odd that someone (actually lots of someones) would be content to trade on a government report + questionable sentiment indicators. But maybe that’s the world we’re in today. If anything, it argues for higher day-today volatility. It also suggests that there’s money to be made for those with better-than-newspaper knowledge, a trading temperament and time to watch the market closely.